,
,
,Accounting and Financial Management 1A
Introduction to Financial Accounting & Key Financial Statements
• Accounting is the process of identifying, measuring, recording and
communicating economic information to assist users to make decisions
• There are 2 separate accounting systems:
o Financial accounting system – periodic financial statements and related
disclosure
▪ Designed for extern decision makers
o Managerial accounting system – detailed plan and continuous
performance reports
▪ Information used by managers throughout the organization
Financial Accounting
• Financial accounting focuses on the provision of information to users external
to the enterprise
• Focused on reporting financial position and financial performance
• Users of accounting information include:
o Bankers – likelihood the company will meet its interest payments
o ASIC – Financial position and performance of a company issuing shares
to the public in IPO’s
o Suppliers – suppliers do not want to deal with non-profitable companies
o Australian Tax Office
o Trade Unions
o Management – in making business decisions
o Shareholders
o Board of directors
o Impacts community
o Impacts employees
Annual Report
• An annual report is a magazine that contains a lot of descriptive information
about the company and general purpose financial statements
Key Financial Statements
• Balance Sheet – Financial position of an enterprise at a particular point in
time
o What are the entity’s resources and how are they financed?
• Income Statement – Financial performance of an enterprise over a period of
time
o Has the entity used its resources efficiently and effectively
, o Profit and loss statement (P&L)
• Cash flow Statement
o Cash inflows and cash outflows
• Notes – to the financial statements i.e. additional details to readers
Balance Sheet
• Reports the financial position of an entity at a point in time
• Used to asses financial structure and ability to pay debt
• Three main elements
o Assets
▪ Resources – they will benefit the company this year (current) or
in future years (non-current)
▪ E.g. cash, property, equipment, inventory
o Liabilities
▪ What the company owes
▪ E.g. accounts payable, loan payable
o Equity
▪ What belongs to the owners, the residual
▪ I.e. what is left after liabilities are taken care of
▪ E.g. Share capital, retained profits
• Assets are due to debt or equity
• The balance sheet shows resources (assets) and claims on those resources
(liability and equity) at a point in time
• Accounting equations:
Appendix: Consolidated financial statement
• Financial statements that factor the holding company (parent company’s)
subsidiaries into its aggregated accounting figures
o A subsidiary is a company controlled by a parent company
o Control exists when the parent company has the power, directly or
indirectly, to govern the financial and operating policy of an entirety so
as to obtain benefits from its activities
• Consolidated financial statements show how the holding company is doing as a
group
Income Statement
• Shows the results of business operations over a specific time period
o Reports revenues earned and any expenses incurred
o Revenue: inflows of economic benefits that increase owners equity
▪ E.g. sales revenue, service revenue, fees earned
o Expenses: use or loss of economic benefits that decreases owners equity
▪ Incurred when you use resources to generate revenue
• If revenues are greater than expenses, there is a profit
• If revenues are less than expenses, there is a loss
• Revenues and expenses are recognized when an economically meaningful event
has occurred Accrual Accounting
o It does not have to involve cash
2
,
,Accounting and Financial Management 1A
Introduction to Financial Accounting & Key Financial Statements
• Accounting is the process of identifying, measuring, recording and
communicating economic information to assist users to make decisions
• There are 2 separate accounting systems:
o Financial accounting system – periodic financial statements and related
disclosure
▪ Designed for extern decision makers
o Managerial accounting system – detailed plan and continuous
performance reports
▪ Information used by managers throughout the organization
Financial Accounting
• Financial accounting focuses on the provision of information to users external
to the enterprise
• Focused on reporting financial position and financial performance
• Users of accounting information include:
o Bankers – likelihood the company will meet its interest payments
o ASIC – Financial position and performance of a company issuing shares
to the public in IPO’s
o Suppliers – suppliers do not want to deal with non-profitable companies
o Australian Tax Office
o Trade Unions
o Management – in making business decisions
o Shareholders
o Board of directors
o Impacts community
o Impacts employees
Annual Report
• An annual report is a magazine that contains a lot of descriptive information
about the company and general purpose financial statements
Key Financial Statements
• Balance Sheet – Financial position of an enterprise at a particular point in
time
o What are the entity’s resources and how are they financed?
• Income Statement – Financial performance of an enterprise over a period of
time
o Has the entity used its resources efficiently and effectively
, o Profit and loss statement (P&L)
• Cash flow Statement
o Cash inflows and cash outflows
• Notes – to the financial statements i.e. additional details to readers
Balance Sheet
• Reports the financial position of an entity at a point in time
• Used to asses financial structure and ability to pay debt
• Three main elements
o Assets
▪ Resources – they will benefit the company this year (current) or
in future years (non-current)
▪ E.g. cash, property, equipment, inventory
o Liabilities
▪ What the company owes
▪ E.g. accounts payable, loan payable
o Equity
▪ What belongs to the owners, the residual
▪ I.e. what is left after liabilities are taken care of
▪ E.g. Share capital, retained profits
• Assets are due to debt or equity
• The balance sheet shows resources (assets) and claims on those resources
(liability and equity) at a point in time
• Accounting equations:
Appendix: Consolidated financial statement
• Financial statements that factor the holding company (parent company’s)
subsidiaries into its aggregated accounting figures
o A subsidiary is a company controlled by a parent company
o Control exists when the parent company has the power, directly or
indirectly, to govern the financial and operating policy of an entirety so
as to obtain benefits from its activities
• Consolidated financial statements show how the holding company is doing as a
group
Income Statement
• Shows the results of business operations over a specific time period
o Reports revenues earned and any expenses incurred
o Revenue: inflows of economic benefits that increase owners equity
▪ E.g. sales revenue, service revenue, fees earned
o Expenses: use or loss of economic benefits that decreases owners equity
▪ Incurred when you use resources to generate revenue
• If revenues are greater than expenses, there is a profit
• If revenues are less than expenses, there is a loss
• Revenues and expenses are recognized when an economically meaningful event
has occurred Accrual Accounting
o It does not have to involve cash
2
